Incredible gains in subscription-based online video-on-demand allowed Netflix to become the number one U.S. online movie service by revenue for 2011 after taking a deep cut into Apple's share of the market.

According to statistics released by research firm IHS, the company known for its red DVD-carrying envelopes grew its share of market revenue from less than one percent in 2010 to over 40 percent in 2011, enough to overtake former leader Apple and its iTunes service. It was reported in March 2011 that Apple only accounted for 4 percent of the U.S. digital video market, but lead in terms of video sales.

Revenue from subscription-based video-on-demand (SVOD) jumped to $454 million in 2011, representing an astounding 10,000 percent change from 2010's $4.3 million. SVOD subsequently became the most valuable sector of the U.S. online movie market, grossly outpacing the 75 percent revenue growth seen by transaction-based services like iTunes.

We are in the midst of a significant change in the way people pay to consume movies online, said Dan Cryan, research director for digital media at IHS. All the significant growth in revenue in the U.S. online movie business in 2011 was generated by rental business models, which provide temporary access, not permanent ownership. Rental delivers unlimited consumption with a low monthly fee for older titles as well as cheap rentals of new releases, providing the kind of value that online consumers want. In contrast, EST, which is much more profitable for studios on a per-transaction basis, is stuck in the doldrums.

IHS Screen Digest June 2012 showed Apple's piece of the pie shrink from 60.8 percent in 2010 to 32.3 percent in 2011, a precipitous drop from the overwhelming 71.5 percent share iTunes enjoyed in 2009. While the iPad maker saw slight declines in 2009 and 2010, the company was well ahead of its closest competition Microsoft, which held 16.7 percent of the market two years ago and Netflix barely factored into the equation.

Netflix's performance is largely based on a combination of the company's decision to directly charge for SVOD access and an overall consumer trend away from physical media services that allow customers an allotted number of DVD and Blu-Ray discs for a monthly fee. When Netflix flipped the switch on its subscription-based online streaming service reaction was minimal as it was included as part of the mail-order pacakge. Interest in SVOD increased, however, as new internet-connected TVs and set-top boxes debuted making it easier for customers to access content. Also playing a factor was the backlash from existing Netflix customers over an attempted spin-off of the company's mail service drove customers online.

2011 marked a sea change in the online movies business that saw the balance of consumer spending shift from a DVD-like transactional model to more TV-like subscription approach, Cryan said. The online movie business more than doubled in 2011 to reach $992 million and it is expected to double this year as well.

Interestingly, the surge in SVOD has caused the online video market to split. Subscription-based services usually concentrate on older titles and TV shows while transaction-based solutions see a majority of its revenue come from new releases. The discrepancy in content stems from studio agreements, demographic targeting and market parity.

Netflix and Apple are competing for some of the same consumer time and money. However, the core value proposition of the two services is actually very different," Cryan said.

Both Apple and Netflix are the top players in their respective arenas despite the iPad maker seeing a drop in transactional sales from 64.6 percent in 2010 to 60 percent in 2011. Netflix rules the SVOD roost as the market share held by its closest competitor Hulu is some ten times smaller.

The amazing growth exhibited by the subscription-based streaming segment isn't expected to continue, however, as the tumult of the online movie market has seemingly calmed. With consumers comfortable in their respective SVOD and pay-per-unit camps, the only disruption could be the entry of a new player or a revolutionary product.